Financial:Addressing immediate and unforeseen crises

March 4th, 2021

Financial:Addressing immediate and unforeseen crises

March 4th, 2021

Economically, the COVID-19 crisis is primarily a liquidity crisis, and financial stress therefore causes a great deal of financial stress. With the spread of the Corona virus, thousands of companies have been forced to temporarily close their doors. Their supply chains are disrupted. Consumers can no longer make many of their usual optional purchases. Therefore, the main priority of a financial leader should be to optimize cash reserves, because the size and duration of a crisis is uncertain. In particular, the CFO should set up a centralized “cash war room” to assess the liquidity of the company so that it can develop different scenarios based on potential routes of virus outbreak and provide an internal and external communication program to compensate for possible damages. Focus.

Set up a cash war room

Most CFOs are currently working very fast to determine the cash value of their companies as well as any incremental capital available. Financial leaders should review cash collections related to the latest sales forecasts. However, with many customers delaying payment, some companies need to receive double the collection to stay flexible. When working capital is no longer sufficient, CFOs should consider investing opportunities, such as joint ventures, lending, and other options, when considering capital raising opportunities.

 If necessary, they should also look for debt agreements as soon as possible to strengthen the balance sheet before it becomes a matter of survival. In such a critical situation, when cash shortages are a clear and strong possibility and the situation is constantly changing, creating a cash war room can help financial managers to impose aggressive countermeasures on organizational costs. . In addition, CFOs can use a variety of financial tools or mechanisms to prioritize payments and impose clear reporting metrics that track liquidity in real time – some call it a “cost control tower.”

Create scenarios

In the midst of this period of uncertainty, finance and strategy teams need to think of a wide range of scenarios rather than time-based frameworks. The financial leader must formulate his or her view on two or three integrated scenarios involving multiple events – for example, which route may be prevalent, and which geographies or industries are ready to recover faster than others? The CFO should also state specific thresholds or incentives that indicate what financial actions the company should take and when.

The Financial Planning and Analysis Group (FP&A) uniquely contributes to this, as it works closely with business units and can help companies pinpoint the effects of the epidemic in various ways. Demand and supply help. Rolling forecasts should include macroeconomic and corporate-specific data to identify key risk areas. Forecasts should also identify secondary effects such as supply chain geographical disruptions and staff turnover, as well as potential sources of cash leakage and customer-related liquidity forecasts.

After all this has been done, the CFO should provide a framework from which a small executive team can make decisions. The financial manager must immediately and effectively pursue decisions regarding the company’s ability to overcome the recession and resume business as soon as the return request begins.

Create a communication plan

The financial manager must play a key role in the financial and strategic aspects of crisis management. As mentioned earlier, the company’s main financial focus during this period will be on implementing a “cash culture” – that is, maintaining cash and establishing dynamism. The CFO should set this priority throughout the organization and help create incentives to strengthen it so that all departments and business units understand “why this is important now” and their particular role in helping to optimize money. What is criticism?

Preventive communication with the board and investors is equally vital. Messages to both should focus on the actual and predicted effects of the crisis on the company, measures taken to protect the business, liquidity status, and any changes in prior earnings obligations. In addition, it is wise for the CFO to increase the frequency of communication with investors after the first few months of the turmoil, especially when new information is available. Such communication is necessary to demonstrate that managers act quickly and decisively based on their correct understanding of the situation.

Creating a voice in a leadership team along the path of financial transformation.

 It is essential that top leaders commit to change. It always encourages the growing effort that thousands of other people must make to succeed in the transformation process. If you show signs of weakness or lack of commitment, your people and employees will receive it immediately. They will not go any further and will not face any more difficulties, especially financial, because they are not sure about your commitment as CEO.

Leaders say they had to work individually with each member of their team to keep them on track. They acknowledged the financial prejudices of each team member and stressed the need to “reset our expectations to ensure that we lead by example.” To create this environment, a manager, for example, had to “accept his weaknesses and build strong relationships individually.” Many acknowledged that not every member of the company’s various teams was willing to go along with the transformation.

Unsuccessful developments are often hampered by the notion that “it can not be done” or “we can not afford it” or other limited mindsets. Successful launches occur when teams avoid disagreements over long-term challenges and immediately focus on the next step – creating a list of initiative ideas. Over the next nine weeks of the company, these initiatives can emerge as a realistic plan with financial positive results and a workable set of set milestones.

Although it is important to understand the potential risks and challenges, not all of them need to be addressed in the initial planning stage. Some executives talked about a two-speed transformation, in which they performed immediate interventions (first speed) to “create the oxygen” needed for complete transformation (second speed). “Not only does this automatically enable the program to make the necessary investments, but it also quickly demonstrates the organization’s bias toward financial action and change,” they said.

Source: Mckinsey&Co.

Adapted from Article: Resolve and resilience: Addressing the immediate crisis

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